Question

Anders Industries currently holds two debts: and $11,000 debt due in 12 months and a $16,000 debt due in 18 months. Anders prepares a classified balance sheet using an 18-month operating cycle. How should these debts be classified?

Answer 1

Answer:

Both debts ($11,000 + $16,000), totalled $27,000 will be classified as the Current Liabilities (CL)  in the balance sheet.

Explanation:

Liabilities could be classified or recognized as the current or the long term liabilities on the balance sheet grounded on when they are expected to be satisfied.

Liabilities which are expected to be satisfied within one operating cycle or 12 months, which ever is longer and satisfied by using the current assets are recognized as the current liabilities. And all other liabilities are known as long term liabilities.

Under this case, the operating cycle is 18 months, which is the dividing line among the long and current term. So, both the liabilities are current liabilities as are satisfied within the duration of 18 months.